Think tank, administration spar over severance tax report

By Joseph Deinlein,
June 9, 2014 at 1:32 PM

Natural-gas drillers have said paying a severance tax on what they pump from the Marcellus Shale formation would be a burden in Pennsylvania.

But the Pennsylvania Budget and Policy Center, a left-leaning think tank in Harrisburg, disputes that claim and offers numbers from the state Department of Revenue going back to 2006, about two years before the gas-drilling boom in the state.

The center put together an analysis, released Monday, that looks at the taxes paid by the industry and natural-gas drillers, the tax incentives the drillers use to lower their tax burden and the impact on profitability if a tax were enacted, said Sharon Ward, the center’s director.

As lawmakers tussle over a $1.5 billion shortfall in a state budget that must be passed by the end of the month, a 5 percent severance tax could raise an additional $400 million on top of the $223 million raised by the current impact fee assessed on wells, said Michael Wood, the center’s research director.

“What our analysis found was how little oil and gas extraction companies actually pay in corporate net income taxes,” he said on a conference call with reporters. “It makes up a very small share of industry payments.”

For the corporate net income tax, which is 9.9 percent in Pennsylvania, gas extraction companies paid only $10.3 million in 2013, according to the analysis. That works out to be about 9 percent of the total tax payments from the industry, which would also include related services, such as natural-gas utilities and pipeline companies.

There was what Wood called an anomaly in 2011, when driller tax payments grew to $105.4 million. He said several things could have caused that blip. For example, because the Department of Revenue only tracks payments, it could be that the companies overpaid and later received refunds.

Regardless, the amount collected declined to $7.4 million in 2012. In 2006, before the shale boom, the Department of Revenue reported $7.2 million in corporate taxes paid by drillers.

In addition, the tax liability has been loosened through individual drilling projects set up as limited liability companies, Wood said. While the extraction company, as a partner in the LLC, might pay 9.9 percent, other partners would only be subject to the 3.07 percent personal income tax rate, he said.

And some companies have taken advantage of federal and state tax loopholes to avoid paying any taxes. Range Resources, the third-largest natural-gas producer in Pennsylvania, has acknowledged this for several years in its annual filings with the Security and Exchange Commission, Wood said.

There are several other tax breaks offered in Pennsylvania that are not offered in other states, such as no property taxes on reserves and other benefits, Ward and Wood said.

“Pennsylvania really has a favorable tax environment for drillers, despite Pennsylvania’s high published corporate income tax rate,” Ward said.

Were the state to enact a severance tax of 5 percent, something that has been proposed by legislators in both parties in the House and Senate, the impact would not have a significant effect on drillers, the report concludes.

Patrick Henderson, deputy chief of staff and energy executive for Gov. Tom Corbett, was critical of the Pennsylvania Budget and Policy Center.

“They have been long-time critics of natural gas development and dismissed its impact on Pennsylvania’s economy as essentially negligible,” he said in an email. “Yet, they apparently also believe that this is a sector of the economy that ought to be taxed in a manner that drives jobs and capital investment away from Pennsylvania. The last time I checked, it was a good thing for a state to have a competitive business climate.”

Henderson also noted impact fees, shepherded by Corbett, have brought in more than $630 million in new revenue since 2012, “benefiting every community across the state.” And he said impact fee revenues for 2014 are up 11 percent over 2013.

“There are very few revenue streams that are up that substantially in this day and age,” he said.

In addition to the impact fees, Henderson said the state has collected “$2 billion in corporate, sales and personal income tax revenue generated by shale gas activity. Many other states do not have the suite of taxes that Pennsylvania does.”

The state also will receive about $14 million from permit fees and that will go to fund the state Department of Environmental Protection’s oil and gas program, Henderson said. Also, the state has received some road improvements worth about $1 billion in deals made directly with drilling companies.